Accounting and Finance Blogs

Bitcoin: Is it a Ponzi Scheme?

Feb 17 2019

Accounting and Finance

Every country has probably had at some point in time its own Charles Ponzi, an influential con artist who lured investors to entrust him with their money and who paid quick returns to the first investors from money invested by later investors. The preys believe that the profits are the result of assets trading and appreciation, and are not aware that fresh funds from new investors are the source of their fictitious profits. With time, the bubble grows, the scheme manager cannot cover the massive lie anymore and the bubble bursts causing collateral damage. Is Bitcoin a Ponzi scheme?

In my opinion, Bitcoin is an extreme form of speculative bubble but I would not call it a Ponzi scheme. In Bitcoin there is no central point of fraud; it's a just an overheated trade: between the months of October and December in 2017, the price of a single Bitcoin grew from around $4,000 US dollars to a little over $19,000 [1]. That’s an increase of nearly 500 percent in under 3 months for an asset that has no fundamental value.

This bubble isn’t the first and it won’t be the last. We’ve had housing bubbles, dot com bubbles, and even a tulips bubble. We might agree or disagree on the name to give to the collapse of Bitcoin, but my 5 cents on trading with such instruments is to stick with the saying of Otto von Bismarck: “Fools say they learn from experience; I prefer to learn from the experience of others”. Watch and learn, better than speculate and suffer!